Peak QE: The End of Easy Money and What it Means for Markets; Plus, Updates on Gold, Energy, the Dollar and More …
There wasn’t much market impact in the aftermath of the Fed’s policy decision last week. And aside from a bounce in the buck and corresponding drop in gold, the markets pretty much shrugged off the news.
But if investors think the Fed meeting
was a non-event, they’re dead wrong.
When the history of this decision is written many years from now, 2017 will be known as the “year of peak QE.” The grand, but ultimately flawed, experiment of quantitative easing, when global central banks attempted to prop up a failing financial system.
Just take a look at the chart below …
The dark blue line tracks the combined balance sheets of the Fed, Bank of England, European Central Bank and Bank of Japan. Nearly $11 trillion in credit created out of thin air to buy financial assets since 2008 … it’s all about to end … and will probably end badly for the markets!
Last Wednesday the Fed said it would start reducing the amount of maturing securities it rolls over by $10 billion-per-month beginning in October, followed by ramping up to a $50 billion-a-month reduction by the end of next year.
This means that between now and then, the Fed will effectively become a net-seller of $420 billion worth of Treasury and mortgage-backed bonds.
And the annual run rate in 2019 will be $600 billion of net selling.
What impact do you think it will have on future bond markets, when more than $1 trillion of demand vanishes over the next two years?
The Fed doesn’t know … and markets have no idea what to expect either, because we’re in completely uncharted territory here! By design, the Fed has been the marginal buyer of last resort for Treasury and mortgage securities for almost a decade. Who will step in to buy as the Fed steps away?
I do know this: Take another look at the chart above. The yellow line tracks the S&P 500 Index.
Notice how it moves in lockstep with rising central-bank balance sheets over the last decade. Coincidence? I think not.
What impact do you think it will have on stocks when central banks no longer print money with reckless abandon?
And it’s not just the Fed. The Bank of England ended its asset purchases, but maintains its balance sheet … for now. But with Brexit looming, pressure will grow to sell off those assets.
The ECB has already started to taper its asset purchases as the Fed has already done. The first step toward an eventual unwinding.
Only the Bank of Japan continues to expand its balance sheet. But now, potential political turmoil in the Land of the Rising Sun: Prime Minister Shinzo Abe is calling for snap elections, which could end Abenomics, resulting in economic chaos in Japan.
Bottom line: QE peaks this year and will level off, then decline in 2018. The rate of decline can perhaps be controlled by central banks, but the unexpected consequences for markets may quickly get out of control.
The era of easy money that helped prop up economies and markets since the last financial crisis is quickly coming to an end. What happens next is anyone’s guess, but the next great financial crisis is right at the top of my list of likely outcomes.
Quick update on key markets …
Gold hit a three-week low last week after the Fed’s policy announcement was a bit more hawkish than expected.
December gold-futures ended at $1,297.70-an-ounce, down just under 2% for the week – falling right into the key support area of $1,280-to-$1,300 that I alerted you to previously.
Meanwhile, gold miners fell about 3%, but this is good news for your Direxion Daily Gold Miners Index Bear 3x Shares ETF (DUST), which jumped nearly 9% last week alone.
And the move is no surprise because our cycle forecasts predicted the correction in gold and mining shares well ahead of time. Only after this correction runs its course will we get the next major buying opportunity in metals that we’ve been waiting for.
That time is fast approaching, but in the meantime, please remain patient and keep your powder dry for more attractive prices to come. And continue to hold DUST for more profit potential …
Treasury bonds fell sharply in price last week, with yields rising, both before and after the Fed. That’s great news for your Direxion 30-Year Treasury Bear 3x Shares ETF (TMV). Hold for more upside ahead as bonds plunge …
The dollar enjoyed a strong rally on the Fed’s more hawkish tone mid-week, ending higher for the week. The cycle charts still call for shift in trend to the upside for the buck. So, continue to hold your ProShares UltraShort Euro ETF (EUO) …
Crude oil moved slightly higher last week as well, after jumping almost 5% the previous week, in sync with our cycle forecast. Natural gas retraced some of its previous gains last week, but we still expect more upside ahead. Continue to hold all your energy-related positions: United States Oil Fund LP (USO), ProShares Ultra Bloomberg Natural Gas ETF (BOIL) and ProShares Ultra Oil & Gas ETF (DIG) for more gains.
Meanwhile, stay tuned for more market insights, analysis and updates coming your way soon.
Good investing,
Mike
